On The House

Biz List Search

They’re back after barely a decade: Escalation clauses in real-estate contracts, “naked”
contingency-free offers and low-priced listings designed to pull in dozens of bidders and turn
routine sales transactions into auctions.

All were techniques last seen with frequency during the frothiest months of the housing bubble
in 2004-05. They are reappearing in some of the hottest sellers’ markets from coast to coast.

Bidding wars are taking place in Washington and its Maryland and Virginia suburbs, Boston, Las
Vegas, Phoenix, Seattle, much of California and parts of Florida.

To get a leg up in such situations, some buyers and their agents are using techniques that can
be effective, but that also come with drawbacks and snares. Among them:

•
Contingency-free and contingency-light offers. Carl Medford, an agent with
Prudential California Realty in the San Francisco East Bay market, says these are almost routine
for buyers determined to win a bidding competition. He calls them “unprotected” contract offers.
Essentially the idea is to strip away some or all of the customary contingencies in an offer that
might irritate a seller or render the buyer’s bid less attractive. The financing contingency, which
makes the entire transaction dependent on the buyer obtaining a satisfactory loan and appraisal,
often is the first to go.

Many buyers are also willing to delete the inspection contingency, which Medford considers much
more risky.

•
Escalation clauses. These are add-ons to contract language that keep bidders in
the competition, even when the price soars well beyond the original asking amount. Typically the
bidder agrees to match and exceed any bona fide competing offers by set increments — say, $1,000 —
up to some maximum amount.

•
Lowball listings. Rather than list a house at the price that comparable recent
sales in the area indicate it’s worth — say $495,000 — the sellers, advised by their agent, cut
that to $479,000, hoping to stimulate a bidding war. Astute shoppers immediately spot the house as
a “bargain,” and multiple competing offers push the final price to $520,000.

Good for the sellers, right? Probably. They get top dollar. But the ultimate buyers end up
committed to a contract requiring them to pay what might be $25,000 over the appraisal value — and
that could negatively affect both the buyer and the seller.